Embedded insurance has been around for some time, but it was typically used for niche general insurance (GI) products such as travel insurance. However, technological advances and the growth of e-commerce, instech and fintech have opened the door for their use in other, more significant lines of business.
Consider the following scenario. You’re buying a new car online. During your completion of the purchase, you’re informed that the purchase price will include automobile insurance coverage for both liability and physical damage. That is embedded insurance. The coverage may be provided by an insurance company owned by the car manufacturer or an existing insurer in the market.
For GI companies writing personal lines coverages, it’s a strategic opportunity for growth. For GI actuaries, the effects on ratemaking and reserving need to be considered. Fortune Business Insights estimates that the global embedded insurance market will grow from USD 144 billion in 2025 to over USD 800 billion by 2032.
Distribution, Data and Risks
Distribution of embedded insurance works best when the purchase of a product or service is closely linked with their risk of a loss. Traditionally, embedded insurance was the domain for travel insurance. Consumers would purchase vacation packages from a travel agency. The purchase process is the time when the consumer is most interested in what protections are provided from possible losses (e.g., inability to travel due to illness, hotel issues, and emergency medical treatment during the vacation). The consumer would accept this coverage without looking at a policy. The distribution is integrated with the purchase from the travel agent.
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This is not to say that actual policy wording is not available to the consumer. It may be available. However, most consumers would just go by the broad description provided. This is similar to what occurs with terms of agreement for apps or software. Most people click through and accept the terms without reading them because they want the app or software. They generally don’t want to spend hours going through complex wording. |
The purchase of a new automobile or a mortgage on a home is linked to the risk of losses providing an opportunity to include embedded insurance.
For automobile insurance, distribution may be integrated into the process of obtaining vehicle financing when purchasing a new vehicle (e.g., Tesla, GM).
Distribution of homeowners insurance can be included in the process of obtaining a mortgage.
For the consumer, embedded insurance provides a convenient way to obtain insurance coverage for losses. For the insurer, this is a different distribution channel than what is used traditionally. There is no insurance broker or agent. This is also not direct marketing. The sale of insurance is part of the process of purchasing some product or service with a link to losses from that product or service.
An insurer’s use of this distribution channel changes the dynamics for who owns the customer relationship, the collection of data and the pricing of the product. The insurer no longer has control over these elements. Actuaries must now model exposure and performance in environments where the insurer may not control the distribution channel or the full customer experience.
The price of embedded insurance is provided by the insurer to the seller of the product or service linked with the risk. However, in some cases this price excludes the sales commission. The seller of the product or service adds their own charge to the insurance price as part of the consumer’s purchase. The insurer may not be able to control this sales commission. The retailer may charge what they believe they can in the market. The insurer has guidelines for underwriting, but the retailer truly controls who obtains the insurance coverage. Additionally, data obtained from different retailers may not be consistent.
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Out of all the insurance coverages being sold to individual consumers and business owners, those with the most to lose or gain from a boost in embedded sales are likely in the auto insurance industry. |
Embedded insurance leverages technology. This typically involves the use of Application Programming Interfaces (APIs) that connect insurers with other businesses such as e-commerce platforms, travel providers, retailers, and financial institutions. These businesses are referred to as the insurer’s partner companies.
The partner companies offer the insurance as an optional add-on, an included feature with a specified cost, or transparently built into the cost of the service. In certain instances, it’s possible for a partner company to suggest that purchase of their product or service is contingent on adding the optional add-on insurance.
The expansion of the use of digital platforms and APIs, the increasing number of InsurTech companies, and technological innovations will fuel the growth of embedded insurance.
Actuarial Considerations
Actuaries pricing embedded insurance should be aware of how data issues (quality, consistency, timing) and underwriting may differ from pricing insurance through traditional distribution channels.
Reserving actuaries need to consider several factors in their estimation of claims liabilities when it includes embedded insurance. Embedded insurance distribution often means that claims are initiated within a third-party system. Differences in reporting lags, claim handling practices, or communication channels can distort loss development patterns (paid and incurred) traditionally modeled. An approach to the reserving analysis incorporating partner-level segmentation of embedded insurance should be considered. This approach would account for the differences in operational processes and customer bases. However, there would need to be sufficient volume for the information to be credible. Stochastic reserving models for a line of business should include an indicator for embedded insurance policies.
Embedded insurance can concentrate exposures. Actuaries should evaluate dependency structures not just between perils, but between distribution partners. This could be important for an insurer’s Own Risk and Solvency Assessment (ORSA) processes and enterprise risk management (ERM) projects.
Regulatory Concerns
Embedded insurance will likely have increased scrutiny as it grows in market share. There is the potential for the embedded insurance model to be a market disrupter if market volume is significant for a line of business (e.g., personal automobile insurance).
There is also the concern that these platforms may be distributing insurance without proper regulatory approval. It is critical that the provision of embedded insurance coverage is in compliance with the regulations for all the jurisdictions in which the policies are sold. Participants in the provision of embedded insurance will be required to prove their insurance products are in compliance with the regulations. Regulations were not written for this business model. Because of this, there may be conflicting interpretations for some insurance regulations when applied to this embedded insurance.
Additionally, there are concerns that the purchaser of embedded insurance will need additional protection. These concerns include:
- Consumers being unaware that they have purchased insurance.
- Consumers not being provided with a clear disclosure of limits, exclusions, or cancellation rights.
- A potential bias in pricing when using digital data from multiple sources to provide automated rates that could use sensitive or prohibited attributes (inferred from a proxy variables).
- Privacy and security of identifiable personal data flowing through different platforms.
Personal Experience
Last year I had an experience with embedded insurance that caught me off guard. I was online purchasing a couple of tickets to a concert through a major ticket seller’s app. I really wanted to obtain these tickets, so I quickly clicked on several checkmarks to arrive at the finalization of the purchase. I got the tickets, so things were all good.
Several days later, I checked my credit card transactions and saw the purchase of the tickets at the proper amount. But then I saw another credit card transaction on the same day with an insurance company that I had never dealt with. The amount was not trivial. I did a little research on the internet and found a thread that said it was a charge for event insurance. In my haste to buy the tickets, I used the click through method I use when installing apps. I missed the fact that one of the checkboxes that I clicked on meant that I accepted event insurance. I saw no policy. I don’t remember seeing a premium amount (it was probably there but I was checking boxes without paying attention). The terms of and conditions of coverage were not shown, though there was likely a link to see them. So, I had bought insurance without knowing it for coverage that I wouldn’t have ordinarily bought. I should also note that when buying tickets for a popular event one must move quickly, or the selected tickets could be sold to the next customer in the queue. There is insufficient time to read over everything. I’m sure that I could have canceled coverage for a refund (less a cancelation fee) but it would involve jumping through hoops and I just didn’t feel it was worth the time and effort. This was a lesson learned. I should understand what I am clicking on.
This was not a unique experience as the thread I found on the internet had numerous people complaining about it. And that doesn’t include the people that didn’t notice the charge because they did not check their credit card transactions.
I have since purchased tickets for two more concerts and hesitated before clicking on each checkbox. I did not purchase the optional insurance both times. One day I’ll read the terms and conditions and determine if I really need the coverage.
Moving Forward
Advances in technology and e-commerce platforms are transforming the landscape for transactions between parties. The provision of embedded insurance is just one of the transformations that is occurring. For GI actuaries, this means adapting models, assumptions, and skills to adapt to an environment where risk, data, and distribution are integrated. Actuaries have an obligation to ensure that under this business model, the coverage is fair to the consumer and adds value to the insurance company.
This article is provided for informational and educational purposes only. Neither the Society of Actuaries nor the respective authors’ employers make any endorsement, representation or guarantee with regard to any content, and disclaim any liability in connection with the use or misuse of any information provided herein. This article should not be construed as professional or financial advice. Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.
Anthony Cappelletti, FSA, FCIA, FCAS, is a staff fellow for the SOA. He can be contacted at acappelletti@soa.org.